How Credit Scoring
Credit scores give lenders a fast,
objective measurement of your credit
risk. Before the use of scoring, the credit granting
process could be slow, inconsistent and unfairly biased.
Credit scores—especially FICO scores, the most widely
used credit bureau scores—have made big improvements
in the credit process. Because of credit scores:
- People can get loans faster. Scores can be delivered
almost instantaneously, helping lenders speed up loan
approvals. Today many credit decisions can be made
within minutes—or online, within seconds. Even a
mortgage application can be approved in hours instead
of weeks for borrowers who score above a lender’s
“score cutoff.” Scoring also allows retail stores, Internet
sites and other lenders to make “instant credit” decisions.
- Credit decisions are fairer. Using credit scoring,
lenders can focus only on the facts related to credit risk,
rather than their personal feelings. Factors like your
gender, race, religion, nationality and marital status are
not considered by credit scoring.
- Older credit problems count for less. If you have
had poor credit performance in the past, credit scoring
doesn’t let that haunt you forever. Past credit problems
fade as time passes and as recent good payment patterns
show up on your credit report. And credit scores weigh
any credit problems against the positive information
that says you’re managing your credit well.
- More credit is available. Lenders who use credit
scoring can approve more loans, because credit scoring
gives them more precise information on which to base
credit decisions. It allows lenders to identify individuals
who are likely to perform well in the future, even
though their credit report shows past problems. Even
people whose scores are lower than a lender’s cutoff
for “automatic approval” benefit from scoring. Many
lenders offer a choice of credit products geared to
different risk levels. Most have their own separate
guidelines, so if you are turned down by one lender,
another may approve your loan. The use of credit scores
gives lenders the confidence to offer credit to more
people, since they have a better understanding of the
risk they are taking on.
- Credit rates are lower overall. With more credit
available, the cost of credit for borrowers decreases.
Automated credit processes, including credit scoring,
make the credit granting process more efficient and less
costly for lenders, who in turn have passed savings on
to their customers. And by controlling credit losses
using scoring, lenders can make rates lower overall.
Mortgage rates are lower in the United States than in
Europe, for example, in part because of the information — including credit scores — available to lenders here.